Australian Dollar: Limited upside as RBA priced – Rabobank

Rabobank’s Senior FX Strategist Jane Foley highlights the strong year-to-date performance of the Australian Dollar (AUD), supported by the Reserve Bank of Australia’s (RBA) hawkish stance and Australia’s commodity-linked profile. However, Foley notes headwinds from a firmer US Dollar (USD) and a weaker Australian trade balance, and expects AUD/USD to consolidate around 0.70 over a three‑month horizon.

RBA pricing caps near term gains

"Despite higher prices for petrol and diesel, it is undeniable that the Australian labour market has remained resilient. The release of June employment data showed an increase of 76.3K jobs, far stronger than expected. The news increased market bets on an August rate hike."

"Even though the next RBA policy meeting is not until August 11, next week brings the release of the Australian quarterly CPI inflation report. This, in addition to a scheduled speech by RBA Governor Bullock, will be closely examined for policy signals. Q2 trimmed mean CPI inflation is expected at 3.7% y/y according to the Bloomberg survey, up from a previous figure of 3.5%."

"Currently the market is priced for another 25-bps RBA rate hike on a 6-month view."

"Given the current strength of market expectations regarding the likelihood of a further RBA rate hike, we see limited upside potential for AUD/USD on a 3-month view. Indeed, the RBA already described financial conditions as “probably somewhat restrictive” at its last policy meeting in June and noted that underlying momentum in household consumption had already started to ease before the onset of the Iran war."

"That said, the recovery in the value of the USD in recent months is a headwind for the AUD/USD as is the weakening in Australia’s trade balance. We favour continued consolidation around the AUD/USD 0.70 area on a 3-month view."